Telstra’s customer focus a winning play

In a week when broadband dominated the political debate and the telecommunications factor sent shockwaves through financial markets because of a
Telstra
profit downgrade, it is arguably excusable to break one of the age old rules of journalism and bring personal experiences into the picture.

Retelling my experiences with Telstra over the past decade provides some insights into Telstra’s problems and what chief executive
David Thodey
must do, and is starting to do, in order to transform the company into a sales and marketing led company.

The personal experience starts with a Telstra fixed line phone bill from 10 years ago for a family of five including three children under the age of 11. It was about $260 a month, not including a company mobile with Telstra.

Fast forward 10 years and the Telstra fixed line phone bill for the same family of five is about $60 a month. However, the family of five now has four mobiles other than the company phone and none of those are with Telstra.

Excluding broadband, the entire household’s telecommunications bill is about $230 a month, but Telstra is only getting a third of that.

This story has been repeated right across the country, with thousands of Australians shifting their calling activity from fixed lines to mobiles. In 2000, Telstra carried 11 billion minutes of billable local calls compared with 4 billion minutes in the year to June 2010, which was down 15 per cent on 2009.

Apart from losing traffic from fixed to mobile, Telstra has not captured enough of those choosing a new mobile. The two teenagers and 21-year-old in our household did not choose Telstra for good reasons. Its plans were not competitive compared with those offered by Vodafone and Optus.

It has been a similar story in smartphones. Telstra relied on its superior network to justify charging more than its competitors. As well, it was slow to recognised the strategic importance of spending money to subsidise the acquisition of customers wanting an iPhone.

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Optus, the Singapore Telecommunications subsidiary run by
Paul O’Sullivan
, took the short -term financial pain on this when the iPhone was first released and is now reaping the benefits in the form of higher average revenue per user.

Even today, an Optus iPhone plan of $79 a month will deliver $800 worth of calls and 2Gb of downloads compared with a Telstra iPhone plan costing $79 a month with $750 of calls and 500mb of downloads.

Returning to the personal experiences with Telstra, the broadband story is encouraging for Thodey.

The household had a Telstra BigPond connection for about five years until rising frustration with the slow speeds, low download limits and high costs prompted a switch four years ago to iiNet, the Perth-based internet service provider. It offered better value plans for ADSL2+ broadband including higher download limits. Its service was better than Telstra thanks to call centres on the east and west coasts of Australia.

But in the past six months, the iiNet customer service has slipped. It issued download limit warnings even after an automatic upgrade to higher download levels and it was slow to respond to complaints. As well, the $69 a month plan with 35 Gb of offpeak and 35Gb peak download limits on ADSL2+ was being stretched to the limit.

When Telstra last month slashed its fixed line broadband prices by 25 to 50 per cent, it suddenly became competitive, with its top line plans at least 20 per cent below its competitors.

But the real test of Thodey’s customer service mantra was: could his company deliver what it promised?

The entire transaction was done online and via email. Having chosen the top of the line HFC cable broadband plan, which offers 200Gb of downloads at $69 a month when bundled with a fixed line phone, the date was set for installation.

That happened on Friday when Leon, a well mannered Telstra technician, turned up within the five hour time frame (7am to noon) and efficiently installed the HFC cable connection from the telephone pole in the street. A day before the installation, a Telstra customer service representative called to confirm the time.

Thodey will be judged on how he executes his strategy over the next two years, but this experience shows that changes he has introduced in Telstra’s customer service systems work.

He will be spending $500 million to $800 million over the next 12 months trying to acquire new customers in fixed line broadband, mobiles, smartphones and wireless broadband. That strategy could have severe consequences for some of his competitors, particularly iiNet.

The Perth-based ISP recently bought the broadband customers of AAPT for $60 million. This deal was welcomed by most analysts, but one exception was Petra Capital analyst Mike Henshaw, who said the transaction had exposed the company to higher operational risks.

The competition in fixed line broadband in Australia is shifting to the sort of model that prevails in the United States, where there is effectively no cap on the data that can be downloaded.

Telstra will be able to become far more aggressive in this area than other companies because of its network capacity and its linkages with overseas countries through its undersea cable assets.

Other internet service providers will be vulnerable to Telstra becoming more competitive.

A lot of Australians have money riding on Thodey getting it right. The company has about 1.4 million shareholders, the largest of which is the Future Fund with 1.35 billion shares. About $5 billion was wiped from the value of the company this week, so there is a lot of work to do just to get back to square one.

The sudden change in Telstra’s approach will come as a shock to those shareholders who believed the transformation story sold by former chief executive Sol Trujillo.

When Trujillo arrived Telstra had net profit of $4.47 billion. Five years later it is 12 per cent lower at $3.94 billion. Revenue in 2005 was $22.76 billion. It has risen 10 per cent to $25 billion but expenses rose by 20 per cent over the same period to $14.187 billion.

The problems the company is facing are to a large extent structural, but it is pretty clear that Telstra shareholders have been poorly served by their management and board of directors over the past 10 years.

The management has been unable to make the necessary cultural changes that were undertaken at other former government owned enterprises such as the Commonwealth Bank of Australia. Telstra still has silos that do not talk to each other.

Over the past 12 months the company probably had a reasonable excuse for not making much progress on transforming the business. It was caught up in intense negotiations over the national broadband network. These were only concluded in the past two months.

In reaching a conclusion to the talks, the company came to the seemingly monumental decision of agreeing to break itself apart, with wholesale effectively sold to the NBN and Telstra’s retail division competing with all the other retail service providers.

Telstra’s switch from being lumbering and out of touch to being a customer and marketing driven company fits well with the NBN world. It will be better off with a Labor Party victory at next weekend’s election.

To gauge just how badly Telstra shareholders have been served by the management and the board one only need look at the comparative performance of the other large regional telecommunications company, Singtel.

Ten years ago Singtel was a mainly fixed line operator that had just purchased a business in Australia from Cable & Wireless that is now called Optus.

From its base in Singapore, which has a population of only 4 million people, Singtel has manage to transform itself into one of the largest mobile phone companies in the world.

It has 300 million mobile phone subscribers across Asia, up from just 1 million in 2000. It has operations across most countries in Asia and it is well positioned to expand in China.

Singtel has grown to have an enterprise value of about $44 billion, compared with Telstra’s $55 billion.

Singtel is well placed to respond to more intense competition from Telstra in Australia. Its subsidiary Optus plans to upgrade its HFC cable in Sydney and Brisbane so that it can carry internet speeds of 100mgbs.